Multilevel governance and Smart Specialization in EU regions: An evidence-based critical review

Wibisono, Eristian Article Multilevel governance and Smart Specialization in EU regions: An evidence-based critical review European Journal of Government and Economics (EJGE) Provided in Cooperation with: Universidade da Coruna Suggested Citation: Wibisono, Eristian (2022) : Multilevel governance and Smart Specialization in EU regions: An evidence-based critical review, European Journal of Government and Economics (EJGE), ISSN 2254-7088, Universidade da Coruna, A Coruña, Vol. 11, Iss. 2, pp. 234-250, https://doi.org/10.17979/ejge.2022.11.2.9004 This Version is available at: https://hdl.handle.net/10419/298650 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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European Journal of Government and Economics ISSN: 2254-7088 Multilevel governance and Smart Specialization in EU regions: an evidence-based critical review Eristian Wibisono a, b, * a Doctoral School of Regional Policy and Economics, University of Pecs, Hungary. b Member of POLISS: https://poliss.eu. This project has received funding from the European’s Union H2020 Research and Innovation Programme under Grant Agreement No 860887 * Corresponding author at: [email protected] Abstract. This paper critically reviews the literature on multilevel governance issues in support of implementing Smart Specialization policies in EU regions. Using an evidence-based critical review approach, key literature that draws on three critical concepts is explored: multilevel governance, regional innovation policy, and Smart Specialization in various governance conditions and diverse regional resources. The evidence reviewed points to the critical role of multilevel governance in implementing Smart Specialization. Effective coordination mechanisms are essential building blocks to encounter the challenges of multilevel governance for Smart Specialization. More consequential, however, are substantial synergies that are solid, harmonious, and balanced among multi-stakeholders within institutions and across levels of government. This paper contributes to the limited literature on multilevel governance in support of the Smart Specialization policy. Further studies considering different types of regions are recommended to enrich future literature. Keywords. multilevel governance, regional innovation policy, Smart Specialization, European Union. JEL Codes. O25, O38, R58. DOI. https://doi.org/10.17979/ejge.2022.11.2.9004 1. Introduction The lack of linkages between local institutions and weak governance in implementing regional innovation policies emerged long before the new concept of place-based policies, Smart Specialization, was introduced while on the other hand, institutional and governance characteristics are vital characteristics that can distinguish one region from another (Isaksen and Trippl 2017; Camagni and Capello 2017). Local government structures are complex with various fragmentation of authority, dense development activities, and limited inter-institutional communication and coordination (Lawson 2003; Henning Kroll 2015). Smart Specialization policy comes with a regional approach or regional diversity (Morgan 2013), which is closely related to the capacity and capability of the region in realizing innovation policies that follow regional uniqueness and regional economic transformation goals. Innovation policies are implemented at various levels of government. Therefore, it is crucial to consider the enabling factors of multilevel governance, especially if the innovation policy involves links between levels of government. As stated by González-López (2019), multilevel interactions Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 235 in regional innovation policies should be considered to gain policy lessons that can be useful for creating better policies in the future. The most prominent challenge in multilevel governance is the interactions between different levels to develop effective innovation policy outcomes (Guimón 2018). However, the question then arises whether the policy mix resulting from interactions between levels of government or the relationship of local policy instruments with other policy instruments can affect the eventual efficiency of innovation policy. In the Smart Specialization policy, there is a lot of skepticism and questioning about whether the new concept of Smart Specialization also considers administrative, institutional, and political characteristics in different types of regions. In other words, does every region with diverse characteristics have the same or different governance problems in implementing the Smart Specialization policy? This paper addresses multilevel governance issues and challenges in the context of Smart Specialization policies and critically reviews evidence and lessons learned in implementing innovation policy strategies in several EU regions. Using a literature review approach, this paper is intended to enrich the study of Smart Specialization place-based innovation policy from the perspective of place-based multilevel governance. By critically reviewing some evidence in several EU regions regarding their Smart Specialization Strategy (S3) development experiences, it is indicated that the role of government in Smart Specialization governance at the local/regional level is closely related to the role and participation of higher levels of government, following the multilevel governance approach. While these related studies are still evolving, the key points presented at the end of this paper are expected to motivate future studies. This paper applies a critical literature review using literature sources published in reputable journals. The research protocol began with the primary literature search using the keywords "multi-level, multilevel, governance, innovation, smart specialization, Europe, and region" in the journal indexing databases Web of Science and Scopus, limiting the scope to the years of the research (2000-2021). A comprehensive background of the literature is presented in two subsections in the second part of the paper, which discusses governance challenges in implementation and how the concept of multilevel governance is appropriate and can support the implementation of Smart Specialization. In the third section, a review of evidence from previous research is presented to demonstrate the success of good governance close to the concept of multilevel governance in supporting the successful implementation of Smart Specialization (S3) strategies in several EU regions. The fourth section presents the paper's conclusions. 2. Multilevel governance in Smart Specialization policy: theoretical background Governance challenges in Smart Specialization implementation The concept of Smart Specialization is driven by the productivity and economic transformation problems of EU member states, which are lagging behind the United States. According to scholars of this concept, such as Foray et al. (2011) and McCann & Ortega-Argilés (2014), the problems Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 236 are more due to internal operational issues of the industrial sector at various technological levels rather than the lack of high-tech industrial sectors in European regions. Developers of the concept of Smart Specialization emphasize the importance of new domain inventions and dynamic entrepreneurship in many future fields that new and more appropriate industrial policies must support. As a result, the involvement of the state or government in this "discovery" process is crucial. This concept upholds the principle that industrial policy should be born from academic recommendations that are then translated into practical policy recommendations (Henning Kroll 2017). Since the Smart Specialization policy is practically reserved for European regions, and therefore guided by the European Regional Policy, the involvement of national public actors in this is very limited (Dominique Foray, David, and HALL 2011; Henning Kroll 2015). It is a "placebased policy" (Barca 2009). Hence, the old productivity-oriented industrial policy at the national level has become more oriented toward regional socio-economic issues, which are still being studied (D Foray et al. 2012; H Kroll 2016; Boschma 2014; Capello and Kroll 2016). In the political agenda of Smart Specialization, the ex-ante requirements of the European Commission require regions to set regional investment priorities obtained through identifying new domains in the entrepreneurial discovery process (EDP). The implementation of Smart Specialization in the regions has become an essential political agenda because the European Structural and Investment Funds (ESIF) have to be accountable to regional political authorities with different capacities among the Member States. There are several essential factors that, according to (Henning Kroll 2017), can cause Smart Specialization policies to be absorbed differently by each region, including variations in regional economic potential, multilevel governance of local governments, and the political culture of local governments. The multilevel governance context of Smart Specialization is essential to a region for administrative reasons. Multilevel governance implies that policy actors who play a role in a particular policy process can play a role again in another policy process (Hooghe, Marks, and Marks 2001; Kuhlmann 2001; Flanagan, Uyarra, and Laranja 2011), for example in the case of Smart Specialization policies. Many regions in Europe (such as some federal government regions in Germany) have decided not to have their regional industrial policies and continue or implement strategic national industrial policies (Henning Kroll 2017). The discovery of new domains and complex EDP processes undertaken at the national level and then adapted at the regional level has raised major questions about what the mix of national and regional policies looks like and how best practices for the financial management of European Funding are implemented at the regional level. A further issue is the structural complexity of local government. Local governments have complex structures with fragmented authorities, dense development activities, and limited inter-agency communication (Lawson 2003). It can be concluded that, in addition to being fragmented, the government has limited internal and external coordination capacity (Henning Kroll 2015). Regional innovation policies long before Smart Specialization was often associated with a lack of linkages between local institutions and weak governance of socio-economic systems (Isaksen and Trippl 2017). Regional innovation policies should consider regional specificities, including the Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 237 governance and institutional character of the region (Camagni and Capello 2017). As a new placebased innovation policy, Smart Specialization puts forward a territorial approach to what is referred to as territorial diversity (Morgan 2013). This territorial diversity is, of course, closely related to the region's capacity and ability to identify the region's economic potential that can truly describe the future development trajectory and structural changes of the region in line with the specificities of its geography. The place-based policy instruments promoted by Smart Specialization have opened flexible access to structural funds according to the context of regional specificities to support the economic transformation goals of the region. González-López (2019) argues for the importance of considering the influence of multilevel governance on innovation policy in the context of regional innovation policy. His concept is based on the two main analytical tools for assessing learning in regional innovation policies that have been raised in the studies of Lundvall & Borrás (1998) and Nauwelaers & Wintjes (2008). Innovation policies are often implemented at different levels of government. Regarding discussing innovation policy in a regional context, it is crucial to consider the multilevel governance structures of different levels of government (regional, national, and sub-national) and their interactions. The key to this concept is, of course, strong coordination to achieve policy coherence. It also means that other levels of government (e.g., EU national or sub-national governments) are external knowledge channels or sources that strongly influence policy learning at the regional government level. Previous scholars have expressed some skepticism about Smart Specialization in the context of regional and local governance, arguing that the policy concept of Smart Specialization is insufficient and incomplete to address administrative, institutional, and political constraints in specific regions. It also means many regional operational capacity issues in implementing Smart Specialization (Capello and Kroll 2016; Iacobucci 2014; Pugh 2014). Concretely, the implementation of S3 in more developed or urban areas has received more attention than, for instance, in less developed regions or sparsely populated areas (SPAs). McCann, P., Ortega- Agiles, R. & Foray, D. (2015, p. 68) mention that the main challenge for the last instance regions in implementing S3 is the limited critical mass of economic actors in these regions. Boschma (2015) argues that regions with weak innovation capacity have less potential to diversify. On the other side, Tödtling & Trippl (2005) argue that due to regional diversity reasons, more underdeveloped regions tend to favor the easy way of copying innovation policy best practices in more prosperous regions. The study by Sörvik et al. (2019) may provide further insights into regional innovation policy issues for Smart Specialization in SPAs with limited local actors and various regional governance, political and administrative matters. The different policy levels at the regional and national levels should not be understood as interchangeable but rather as interdependent and complementary (Guimón 2018). Multilevel governance refers to the proportional and tiered division of responsibilities in the process of policy planning and implementation across different administrative and territorial levels (Benz and Eberlein 1999; Koschatzky and Kroll 2009). The most prominent challenge in multilevel governance is the effectiveness of interactions between different levels to create efficient Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 238 innovation policy outcomes. A further challenge relates to the policy mix resulting from interactions and interdependent relationships with other policy instruments that can affect the efficiency of innovation policies (Flanagan, Uyarra, and Laranja 2011; Martins 2016). Some studies show that the combination of policy mix and multilevel governance is believed to create a more effective innovation process locally than at other levels (Karo 2012; Howlett and Rayner 2007). However, it is crucial to bear in mind that while this combination has the potential to increase the effectiveness and efficiency of regional innovation policies, coordination failures can vandalize the expected success. Possible administrative governance problems include policy duplication and overlapping, poorly agreed prioritization, and policies that are not coherent and consistent with other policies (Magro, Navarro, and Zabala‐Iturriagagoitia 2014). In the Smart Specialization policy context, regions are encouraged to actively participate in determining priority domains according to their regional characteristics either as participatory partners in bridging national policies or independently developing policies and strategies independent of national authorities and implementing projects according to their resources (Cohen, 2019; Laranja et al., 2020). Smart Specialization is an evolving regional policy concept that draws on established concepts of governance and regional innovation systems (del Carmen Sánchez-Carreira, González-López, and Varela-Vázquez 2021; Hassink and Kiese 2021; Gancarczyk, Ujwary-Gil, and González-López 2021). This policy places great emphasis on mechanisms for sharing responsibility and proper coordination between various local actors and at various levels of government (Moodie et al. 2021; Larrea, Estensoro, and Pertoldi 2019; Guzzo and Perianez-Forte 2019; Marinelli, Fernández Sirera, and Pontikakis 2021; Serbanica 2021; Magro and Wilson 2019). The Smart Specialization Strategy (S3) faces many challenges in its implementation. Developing and underdeveloped countries or regions, in particular, with decentralized innovation policy structures, face more acute challenges due to the diversity of their innovation systems (Trippl, Zukauskaite, and Healy 2019; Papamichail, Rosiello, and Wield 2019; McCann and Soete 2020; Dominique Foray 2019). This phenomenon is exacerbated by the problem of institutional instability and income inequality which are still the leading cases even in developed countries such as the US, UK, and several member countries of the European Union (Atkinson, Casarico, and Voitchovsky 2018; Cassiolato and Lastres 2000). Guimón (2018) explores several issues related to the decentralization of science and innovation policies in several developing countries. Two interesting things discussed in his study are the importance of competency sharing and proper coordination mechanisms at various levels of government. The division of local government competencies in developing Smart Specialization policies in the regions must be adequately distinguished from the central or national government. In addition, the proper coordination mechanism between levels of government must also be regulated to address various governance issues in the implementation of S3 (Valdmaa, Pugh, and Müür 2021; Ruhrmann, Fritsch, and Leydesdorff 2021; Ghinoi et al. 2021; Dominique Foray, Eichler, and Keller 2021). Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 239 How does multilevel governance support the implementation of Smart Specialization? Multilevel governance (MLG) can be understood as the active involvement of local innovation actors in developing or implementing policies through formal and informal mechanisms (Tödtling- Schönhofer et al. 2013; Caponio 2021; Ongaro et al. 2019; Moodie et al. 2021). The definition of MLG put forward by Schmitter (2004) is: "arrangements for making binding decisions that involve multiple politically independent but interdependent actors - private and public - at different levels of territorial aggregation in more or less continuous negotiation/ deliberation /implementation, and that do not assign exclusive policy competence or assert a stable hierarchy of political authority to any of these levels". Barca (2009) defines MLG as a system where policies are designed, implemented, and distributed across different levels of government and local authorities or institutions according to their respective objectives. Furthermore, Serbanica & Constantin (2017) underline the role of MLG in integrating various policies and activities at different levels of government, emphasizing the importance of synergy between all actors. In the context of EU policy, the concept of MLG has been used explicitly with the concept of a network approach or interrelated relationships without paying attention to hierarchical relationships. In this approach, MLG is described as "a collective decision-making process by multi-stakeholder authorities at different levels of governance and across different policy sectors" (“Spatial Foresight Local and Regional Partners Contributing to Europe 2020” 2015). Hooghe et al. (2001) classify MLG into two types: Type 1, which promotes the concept of vertical governance relationships where decisions in a process are taken based on hierarchical relationships and geography, and Type 2, which promotes more fluid horizontal relationships, which seems more appropriate in the context of Smart Specialization innovation policy. Smart Specialization foregrounds the relationships of the four elements of the Quadruple Helix and places importance on the horizontal interactions of various regional innovation actors in generating new domains in formulating the Smart Specialization Strategy (S3). Interactions between national and local/regional governments in the S3 development process may be limited to optimizing the role of local entrepreneurial actors who best understand local conditions. Therefore, considering multilevel governance (MLG) in the implementation of Smart Specialization that involves the role of government at several levels (national, regional, and subregional) will potentially improve the effectiveness and efficiency of collaboration between them. On the one hand, national governments may have better competencies than regional governments, or regional governments may have better competencies than sub-regional governments. But on the other hand, it is not necessarily that the government at a higher level can always be present to handle many things at once when in a region, new domain opportunities arise in various fields or sectors. It then raises the question of the optimal governance mechanism in managing S3 at various levels and interconnecting horizontally and complementing each other (Larrea, Estensoro, and Pertoldi 2019). The rationale behind Smart Specialization is a place-based approach that has the potential to be implemented in any region through at least two things: collaboration between different levels Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 240 of government with similar or different levels of knowledge for learning; and capitalizing on the local government's strong understanding and knowledge of its potential. Thus, quoting from Larrea et al. (2019), the main concept of MLG for Smart Specialization can be said to be a complex collaboration process between different government authorities to make S3 open and accessible to other actors. The MLG concept can help improve the implementation of S3 in accordance with the fundamental principles of Smart Specialization (Cohen, 2021; Joint Research Centre, Institute for Prospective Technological Studies, Goenaga Beldarrain, & Foray, 2013). First, linking S3 priority programs with local investments enhances innovation capacity and local knowledge (level of granularity principle). Second, it positions the government as a platform that guides the entrepreneurial discovery process (EDP) in identifying and integrating local assets and knowledge. Thirdly, S3 emphasizes the importance of monitoring and evaluation involving all stakeholders through relevant communication mechanisms and for learning purposes. The description above confirms that governance challenges emerge as an essential issue in the implementation of S3; thus, MLG also emerges convincingly. While multilevel coordination in implementing S3 is crucial, it is also essential to understand that MLG, in this case, is more of a "joint strategy creation process" where significant central government control over cohesion projects for local interests must also be balanced (Marques & Morgan, 2018). Based on these arguments, it can be convinced that the Smart Specialization framework requires a significant role of local governments and actors, which the MLG concept could potentially support. In this regard, this paper will afterward focus on how the role of government at various territorial levels with a multilevel governance approach can support the implementation of Smart Specialization. 3. Multilevel governance and Smart Specialization in EU regions: an evidence-based critical review This section aims to present evidence and a critical review of the various governance-related challenges in the implementation of S3 in EU regions and how the Multilevel Governance (MLG) approach could then potentially help improve the implementation of S3 in different regions in the EU. This section also intends to show that according to the experience and evidence from several EU regions, the Smart Specialization framework essentially has features that are mutually supportive with the MLG concept as discussed in the previous section. In the first critical review, I observe what has been discussed by Kroll (2017), who takes a case study of the multilevel governance of regional innovation policy in two regions in Germany, North Rhine-Westphalia (NRW) and Saxony. As in Germany's federal system, all Länder have a very complex set of federal-regional duties per the country's constitution. The federal government handles innovation and technology policy in Germany, and meaningful projects resulting from the entrepreneurial discovery process are also financed nationally without much regional involvement, especially in terms of budget. In short, the German federal government plays the most crucial role in innovation policy at the regional level. Furthermore, within a complex Eristian Wibisono / European Journal of Government and Economics 11(2), December 2022, 234-250 241 governmental structure, innovation and technology policy in Germany involves three prominent authorities that deal with economics, science, and the chancellery. Each of these entities has diverse resources and elements of interest within its organizational structure. Effective coordination is the most substantive challenge in this regard. In the first case study of North Rhine-Westphalia (NRW), Kroll (2017) emphasizes governance aspects. Critical actors in the region play a significant role in regional innovation policy even though it is integrated into the national innovation policy. As the region is autonomously wellequipped with strategic facilities and resources, its regional innovation success is less dependent on the national investment (H Kroll and Meyborg 2013). North Rhine-Westphalia (NRW) has developed specialized policies in the long term as national policies cannot always facilitate the regional transformation challenges NRW. In addition, due to the region's large geographic and economic size, another challenge is the complexity of its administration. The NRW region may have managed to overcome budgetary issues and its administration. However, there is complex coordination and communication within the internal agendas of ministries and agencies. Due to the challenges of the region's transformation, NRW was fully supported by European Structural Funding over a long period which causes NRW's regional administrative capacity has emerged as an essential factor in supporting regional innovation policy. The following case study from Kroll (2017) study is the region of Saxony, which represents the eastern part of Germany. Saxony joined the Federal Republic of Germany in 1990, and since then, its focused economic policies have transformed its economy and made it the strongest in East Germany. Due to the remarkable legacy of the previous government system, the region has many qualified human resources. Information Technology (IT) is emerging as the region's new leading industry, while the machinery industry inherited from the past is still a strength that continues to be promoted (Zenker and Kroll 2014). The entrepreneurial discovery process in many fields has been successful, but these new domains generally differ from the previously existing and thriving leading fields. In the process of successful economic transformation, Saxony has greatly benefited from national investments that was supported by three critical success factors: public research institutes, leading universities, and clusters of regional (Zenker and Kroll 2014). Local governments focus European Structural Fund for Saxony on supporting the growth of mid-cap companies. Although the geographic and economic size of the Saxony region is much smaller than NRW, Saxony is administratively challenged in its regional organization efficiency. The organization created after the reunification process is still relatively new, replacing the previous organization. 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